Blue Oceans for Health   Smarter, Better Healthcare Through New Products, Services, and Ideas

Jerry Sanders, one of the medical device industry’s top entrepreneurs, visited Saïd Business School last month for a series of masterclasses on his role in the startup industry. Sanders’ firm San Francisco Science is legendary for its ability to identify promising innovatons that big medical device companies will pay handsomely for. Given the firm’s success, it was quite a shock when Sanders acknowledged that SF Science’s activities were being gradually run down because of what he believed to be the decreasing attractiveness of the market for independent medical device developers. To that effect, Sanders has reduced the number of deals he runs per year from greater than twenty to two active deals currently and only takes on new projects that meet an unusually high level of return for the risk involved.

To summarize Sanders’ argument, independent medical device firms — often only inventor, engineer, financial-whiz, and a few support staff — have been disproportionately impacted by the FDA’s increasing conservatism in the approval of new drugs and medical devices. Following the Vioxx recall, regulatory approval has become both more difficult and more expensive. This constellation of problems has made it near- impossible for a small medical device firm with perhaps 2-3 early-stage products to actually become commercially successful on its own. Essentially, the only option available to bring a medical device to market is to quickly identify a consolidated medical device company (e.g., Johnson & Johnson, Covidien) who is interested in adding a particular innovation into an existing product platform. This situation puts independent medical device innovators into a difficult strategic position. Rarely will more than one or two of the diversified device companies have interest in a particular innovation, but the inventor is often looking for a quick outcome that either funds him or her to progress with further development or exit and move on to something else. A desperate seller and a large, powerful buyer allows for the latter to capture much of the value generated from the deal and leaves the entrepreneur with limited upside.

Does Signostics even have a chance? (Courtesy: Signostics)

To use a real-world example from an earlier post, has the GE VScan device already beaten other handheld ultrasound competitors like Signostic’s Signos Personal Ultrasound because whatever incremental feature benefit Signostics may have will never allow the firm to compete with such an established player in a highly regulated industry? According to some of the leading lights of this industry, the only option for many of these smaller firms is early exit.

What explains Sanders’ complete exit from this industry is that the difficulties he spoke of have little or no chance of disappearing soon. The contentious state of American politics makes ambitious change at the FDA highly unlikely in the near future (although future rumblings do exist). With the increasing role of corporate influence on future regulation, it is likely that any reforms to the FDA device approval process will likely benefit large diversified device firms as much if not more than they do the smaller independent device makers. During a masterclass, Sanders noted that contrary to conventional wisdom “Big Business” (defined here as large consolidated device makers) often welcomes increased regulatory oversight because such hurdles disproportionately hurt small, new entrants to their established industries.

While incremental improvements to existing medical devices will continue to be churned out by the “majors,” the current business and regulatory environment of the medical device industry make the emergence of new, disruptive innovations far less likely.